A Moving Average is a simple tool that smooths out a stock's price by averaging it over time. It helps traders spot trends by filtering out the noise of daily price movement.
Types of Moving Averages:
• Simple Moving Average (SMA): average of past prices.
• Exponential Moving Average (EMA): gives more weight to recent prices.
Moving averages help identify the direction of the trend. When the stock is trading above its moving average, it may indicate an uptrend. If it's below, it may be in a downtrend.
Moving averages are one of the most commonly used tools in technical analysis. They help confirm trends and support or resistance levels. Traders also use crossovers — when a short-term average crosses a long-term one — to generate signals.
Example: A penny stock crosses above its 50-day moving average and volume increases — this could signal a breakout and attract more buyers.